There is zero crowding out and the federal budget is balanced at the time government purchases are increased.It follows that the __________ curve shifts to the __________,and in the short run both the price level and Real GDP __________.
A) AD; left; rise
B) AD; right; fall
C) AD; right; rise
D) AD; left; fall
E) SRAS; right; rise

Question

Quizplus · Accepted Answer

If there is zero crowding out, then an increase in government purchases will lead to an increase in aggregate demand (AD). At the same time, if the federal budget is balanced, there is no impact on the overall level of taxation, which means that there is no offsetting decrease in private consumption or investment. Therefore, the AD curve shifts to the right. In the short run, both the price level and real GDP will rise as a result of the increase in government purchases and the corresponding increase in aggregate demand. Option C is the only choice that correctly reflects this outcome.

There Is Zero Crowding Out and the Federal Budget Is